The competitive intensity of any industry: The fundamental forces

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The competitive intensity of any industryThe
fundamental forces

• Professor Patrick Mc Namee

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Intensity of industry competition

• Coincidence?
• Luck
• No
• Underlying structure
• Not just competitors

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The competitive forces in all industries

• Threat of entrants

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Threat of entrySix major barriers

• Scale
• Differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Non-scale advantages
• Proprietary technology
• Favourable location
• Government help
• Experience

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Exit and entry barriers
Low
Exit Barriers
High
Low
Entry Barriers
High
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Buyer poweris strong when

• Large purchases, especially when fixed costs high
• Important to buyer
• Standard products
• Low switching costs
• Earns low profits
• Threaten backward integration
• No threat of forward integration
• Product unimportant to buyer
• Buyer has full information

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Supplier power (Mirror of Buyer power)is strong
when

• Highly concentrated
• No substitutes
• Not an important customer of supplier
• Supplier product not important
• Suppliers products differentiated
• Supplier has switching costs
• Threatens forward integration
• Government is a supplier

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Substitute products

• Other products/services which perform the same
  function
• Place a ceiling on the price

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Intensity of rivalry

• Numerous equally balanced competitors
• Slow industry growth
• High fixed costs
• Lack of differentiation
• Large increments in capacity
• Diverse competitors
• High strategic stakes
• High exit barriers

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Competition all five forces

• Actual market rivals
• Potential entrants
• Buyers
• Suppliers
• Substitutes

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The goal of competitive strategy

• Find a position in the industry where you can
  best defend yourself
• How?
• Appraise each force
• Then
• Compete using a generic strategy

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The axes of rivalry

• Price
• Promotion
• Innovation
• Service
• Quality

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How to competeThe generic strategies

• High volume low cost (HVLC)
• Differentiation
• Focus

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Generic Strategy 1 High volume low cost
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Cost leadershipNeeds

• Aggressive scale building
• Vigorous cost reduction
• Tight cost control
• Avoid marginal accounts
• A culture of low, low, low, cost

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Low cost risks

• Too narrow
• Learning
• Capital investment
• Technological change
• Overcapacity

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Generic Strategy 2 Differentiated premium price
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Differentiation

• Brand loyalty protects
• Price premiums loyal buyers
• High margins to deal with supplier power
• Buyer power reduced alternatives denied

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Differentiation risks

• Giant cost differential
• Buyers needs change
• Imitation

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Which generic strategy?

• You really must pick one
• Each generic requires different styles,
  resources, structures etc.

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Focus risks

• Cost differential widens too much
• Too narrow a view industry may be changing
• Focuser may be out-focused

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The U shaped curve
Low
ROI
High
Low
High
RMS
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Table 10 A market leader with premium products
has a very strong competitive advantage
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The competitive forces in the information age

• More important than ever
• Generic strategies vital the basis of much
  successful e-business
• The big changes
• Switching costs reduced
• Fantastic opportunities to resolutely pursue a
  generic

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The competitive intensity of any industryThe
fundamental forces

• Professor Patrick Mc Namee

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